ET BureauIn the eight years as managing director of IndusInd Bank, Romesh Sobti has transformed a lethargic private sector lender to a dynamic darling of investors, in the process, multiplying the bank’s annual net profit 30 times to Rs 2,286 crore in 2015-16 from just Rs 75 crore in 2007-08. In an interview with ET, the electrical engineer-turned-banker looks back at the journey even as he says that the future of the bank will be better than its past. Edited excerpts:
When you took over, what were the challenges?
Customers will bank with you if you have credibility, shareholders will put money in you if you have credibility, regulators will take a better view if you have credibility. With all stake holders, you have to create credibility — that was our biggest challenge. It’s for the market to judge whether we are more credible today than we were eight years ago.
Looking back, how would you describe the journey?
It’s been a satisfying journey, but there’s no room for complacency because we have always believed that the future is better than the past. Nobody is resting on their laurels: we have had both tailwinds, and headwinds. We have been fortunate to ride the tailwinds and had the fortitude to fight the headwinds. The big takeaway is that if you have a well thought out and clear strategy and if you execute it properly, these sort of turnarounds are possible in any industry. The way the management team stayed together, the validation of our business model that was thought out eight years ago, and our ability to infuse capital again and again to fuel the balance sheet and introduce the hygiene of a compliant organisation are the big takeaways.
What is the role of the promoter shareholders in the bank?
In our board, the major shareholders are not represented. So it is thoroughly and completely professionalised. That’s trending around the world. Ownership is being divorced from executive management, and owners and promoters have divested themselves from board responsibilities around the world. Boards have to be professionally and independently run. This is a choice promoters exercised in our case. We, the executive management, ran it as professionals before, we run it as professionals now, and we hope to do the same in the future. The board has responsibilities and lot of them are statutory. Responsibilities of shareholders, board and executive management are clearly defined. Our promoters are promoter investors because of the fact that they are the largest single group. They have been always hands-off. The management change happened with the understanding that the board and the executive management will run the bank and that is how it is.
Succession is one risk investors keep talking about?
Succession planning is the board’s preserve, and my preserve is to create succession for my direct reports. Ultimately the board decides the succession planning, and has applied its mind several times on this issue — there is a well thought out plan. It is an exercise that has been going through because a year ago there was uncertainty on extension and then the board had thought through a succession plan, so contingencies had been built in and all I can say is that the board is convinced that it will create a smooth succession. No institution worth its salt will ignore this issue — investors have stopped asking me this question.
How do you see the business in the next five years?
The next five years will be more interesting because the operating environment has changed for the better and our positioning has improved in terms of being well-capitalised with a good talent base. All these point to the fact that the future should be better than the past. The banking sector is going through some tough times as far as the borrowing part of the balance sheet is concerned, but the underlying growth is visible now and the NPA issues will get sorted out in the next 12 to 18 months.
IndusInd’s fee growth is faster than loan growth. What’s the outlook?
Half of our fee come from retail which is granular. We hope that we are very good distributors of thirdparty products which don’t use the balance sheet. The fee to assets ratio is really a function of that. We have also built up trade and remittances on the corporate side in the past eight years and also forex and treasury. We focused on the distribution right from the beginning. We have created dozens of fee lines. This will remain crucial to our growth. We will just keep doing what we are doing on a larger scale.
How do you see the mix of retail changing in the next few years?
We have articulated that we will first move to 50:50 in retail and corporate. We think that even while we are growing our corporate franchise, there’s strong momentum in the next three years on the retail side, especially non-vehicle retail. We are seeing a secular run on the vehicle side and if non-vehicle also keeps moving, we will probably go towards a higher percentage of retail above 50%. We see the balance shifting towards retail as it grows faster. The vehicle and non-vehicle will also balance out at 50:50 within retail from 70% in favour of vehicles now.
What are the advantages of this?
It will de-risk us from cyclical elements of vehicle financing, which goes through a cycle every five or six years. While we navigated these cycles, but still we are impacted. Our vehicle growth slowed to 10% in FY15, and now it has increased to more than 20%. It will help spread out our risk together with de-risking revenues. The yield mix will be lower than the blended yield of commercial finance, but it will still be better than the corporate yields.
What’s the plan on corporate?
We have been broad-basing our franchise and deepening our existing relationships. We have to improve our cross-sell and bring in some degree of specialisation. We are multi-focused, but we expect retail to grow faster in the next three years.
When you took over, what were the challenges?
Customers will bank with you if you have credibility, shareholders will put money in you if you have credibility, regulators will take a better view if you have credibility. With all stake holders, you have to create credibility — that was our biggest challenge. It’s for the market to judge whether we are more credible today than we were eight years ago.
Looking back, how would you describe the journey?
It’s been a satisfying journey, but there’s no room for complacency because we have always believed that the future is better than the past. Nobody is resting on their laurels: we have had both tailwinds, and headwinds. We have been fortunate to ride the tailwinds and had the fortitude to fight the headwinds. The big takeaway is that if you have a well thought out and clear strategy and if you execute it properly, these sort of turnarounds are possible in any industry. The way the management team stayed together, the validation of our business model that was thought out eight years ago, and our ability to infuse capital again and again to fuel the balance sheet and introduce the hygiene of a compliant organisation are the big takeaways.
What is the role of the promoter shareholders in the bank?
In our board, the major shareholders are not represented. So it is thoroughly and completely professionalised. That’s trending around the world. Ownership is being divorced from executive management, and owners and promoters have divested themselves from board responsibilities around the world. Boards have to be professionally and independently run. This is a choice promoters exercised in our case. We, the executive management, ran it as professionals before, we run it as professionals now, and we hope to do the same in the future. The board has responsibilities and lot of them are statutory. Responsibilities of shareholders, board and executive management are clearly defined. Our promoters are promoter investors because of the fact that they are the largest single group. They have been always hands-off. The management change happened with the understanding that the board and the executive management will run the bank and that is how it is.
Succession is one risk investors keep talking about?
Succession planning is the board’s preserve, and my preserve is to create succession for my direct reports. Ultimately the board decides the succession planning, and has applied its mind several times on this issue — there is a well thought out plan. It is an exercise that has been going through because a year ago there was uncertainty on extension and then the board had thought through a succession plan, so contingencies had been built in and all I can say is that the board is convinced that it will create a smooth succession. No institution worth its salt will ignore this issue — investors have stopped asking me this question.
How do you see the business in the next five years?
The next five years will be more interesting because the operating environment has changed for the better and our positioning has improved in terms of being well-capitalised with a good talent base. All these point to the fact that the future should be better than the past. The banking sector is going through some tough times as far as the borrowing part of the balance sheet is concerned, but the underlying growth is visible now and the NPA issues will get sorted out in the next 12 to 18 months.
IndusInd’s fee growth is faster than loan growth. What’s the outlook?
Half of our fee come from retail which is granular. We hope that we are very good distributors of thirdparty products which don’t use the balance sheet. The fee to assets ratio is really a function of that. We have also built up trade and remittances on the corporate side in the past eight years and also forex and treasury. We focused on the distribution right from the beginning. We have created dozens of fee lines. This will remain crucial to our growth. We will just keep doing what we are doing on a larger scale.
How do you see the mix of retail changing in the next few years?
We have articulated that we will first move to 50:50 in retail and corporate. We think that even while we are growing our corporate franchise, there’s strong momentum in the next three years on the retail side, especially non-vehicle retail. We are seeing a secular run on the vehicle side and if non-vehicle also keeps moving, we will probably go towards a higher percentage of retail above 50%. We see the balance shifting towards retail as it grows faster. The vehicle and non-vehicle will also balance out at 50:50 within retail from 70% in favour of vehicles now.
What are the advantages of this?
It will de-risk us from cyclical elements of vehicle financing, which goes through a cycle every five or six years. While we navigated these cycles, but still we are impacted. Our vehicle growth slowed to 10% in FY15, and now it has increased to more than 20%. It will help spread out our risk together with de-risking revenues. The yield mix will be lower than the blended yield of commercial finance, but it will still be better than the corporate yields.
What’s the plan on corporate?
We have been broad-basing our franchise and deepening our existing relationships. We have to improve our cross-sell and bring in some degree of specialisation. We are multi-focused, but we expect retail to grow faster in the next three years.
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